Marginal Rates: Salary vs Dividend (2025/26)
| Income Band | Salary Marginal Rate | Dividend Marginal Rate | Dividend Saving |
|---|
| Within Personal Allowance (up to £12,570) | 0% | 0% | 0% |
| Basic Rate Band (£12,571–£50,270) | 28% (20% IT + 8% NI) | 8.75% | 19.25% |
| Higher Rate Band (£50,271–£125,140) | 42% (40% IT + 2% NI) | 33.75% | 8.25% |
| Additional Rate (above £125,140) | 47% (45% IT + 2% NI) | 39.35% | 7.65% |
Note: Employer NI of 13.8% on salary above £9,100 is an additional company cost not reflected in the employee take-home figure above, but it further widens the advantage of dividends.
Worked Example: Company with £50,000 Profit, Extract £30,000
Scenario: Director has already taken salary of £9,100, wants to extract £30,000 more
| Method | Gross Paid | Income Tax | NI | Net Received | Effective Rate |
|---|
| As Salary (PAYE) | £30,000 | £6,000 (20%) | £1,666 (8%)* | £22,334 | 25.6% |
| As Dividends | £30,000 | £2,581 (8.75%) | £0 | £27,419 | 8.6% |
| *NI on additional salary above £12,570. Income already within basic rate band. Dividend allowance £500 applied. |
Tax saving by paying dividends vs salary in this example: approximately £5,085 per year. Over 5 years, that is over £25,000 in saved tax.
IR35 Warning
Inside IR35 = All income treated as salary. If your contract is deemed inside IR35 (off-payroll working rules), you cannot take the income from that contract as dividends and enjoy the lower tax rates. All income is subject to income tax and NI as if you were a direct employee, eliminating the dividend advantage.
IR35 applies to workers in the public sector and at medium/large private sector clients since April 2021. The end client determines IR35 status in these cases. Sole traders are not subject to IR35.
Frequently Asked Questions
Are dividends always better than salary for directors?
For most limited company directors above the Personal Allowance, dividends result in a lower overall tax burden because dividends are not subject to National Insurance and are taxed at lower rates (8.75% vs 20% income tax + 8% NI at basic rate). However, salary can be better for NI credits, mortgage applications, and pension auto-enrolment purposes.
What is the dividend tax rate for 2025/26?
The 2025/26 dividend tax rates are: £500 Dividend Allowance (tax-free), 8.75% on dividends in the basic rate band, 33.75% on dividends in the higher rate band, and 39.35% on dividends in the additional rate band. Dividends are added on top of other income when determining which band they fall into.
What is the marginal rate on salary vs dividends?
Within the basic rate band: salary is taxed at 20% income tax + 8% NI = 28% effective marginal rate, while dividends are taxed at 8.75%. In the higher rate band: salary attracts 40% + 2% NI = 42%, while dividends attract 33.75%. In the additional rate band: salary is 45% + 2% NI = 47%, dividends are 39.35%.
How much Dividend Allowance do I get in 2025/26?
The Dividend Allowance for 2025/26 is £500. This means the first £500 of dividend income each year is tax-free, regardless of which tax band you are in. This applies in addition to the Personal Allowance of £12,570.
What happens to dividends inside IR35?
If your limited company engagement is deemed to be inside IR35, all income from that contract is treated as deemed salary, subject to income tax and NI as if you were a PAYE employee. You cannot take income as dividends from an IR35 contract and retain the tax advantages.
Why might salary be better than dividends?
Salary can be better for NI credits (State Pension), mortgage applications (some lenders prefer salary), Statutory Sick Pay and Maternity Pay (based on salary only), and pension auto-enrolment eligibility. Within the Personal Allowance, salary and dividends have the same tax cost (zero), but salary reduces Corp Tax for the company.
Can I pay dividends to my spouse?
Yes, if your spouse holds shares in the company, they can receive dividends using their own Personal Allowance and Dividend Allowance. This can effectively double the tax-free income available. The arrangement must be commercially genuine; HMRC may challenge it under the settlements legislation if the shares were transferred solely to avoid tax.